Expect a lot...

...but not miracles

THE past 20 years have spanned central banking's golden age. Out of the ruins of the 1970s inflation and after a hard-fought decade repairing the damage in the 1980s, a handful of people laid down the foundations for prosperity. In an era when state planning fell into disrepute, here was one lot of technocrats who actually knew what they were talking about.

So it may seem churlish to dwell on what has gone wrong. But this summer's credit crunch foreshadowed difficulties central banks will continue to face. Some of these are the eternal dilemmas that central bankers are doomed to relive time and again. If action in a crisis saves the innocent but also rewards foolishness, how should they strike the balance? Some are the problems of success. How do you ward off asset-price insanity when inflation expectations are low and the appetite for risk has grown too much? And some of the riddles are new. How do you safeguard the financial system from extravagance that rapidly spreads from the fringes of financial innovation to the centre?

Perhaps this summer's most troubling lesson, however, was not economic or supervisory but political. As people have grown accustomed to the benign economic conditions that central banks have helped to create, they have forgotten just how hard-won the victory over inflation was. Just suppose another fight were needed: would the world have the stomach for it?

During the credit crunch Mr Bernanke at the Fed came under huge political pressure to cut interest rates. Mr King at the Bank of England found it impossible to stick to his stern rule about providing liquidity to the interbank market. Mr Trichet at the ECB received a haranguing at the hands of Nicolas Sarkozy, his compatriot and the president of France. And this was not even a recession. In his recent book, Mr Greenspan said he was worried that the central banks would be unable to withstand the political pressure to inflate if the temporary cost of steadfastness in jobs and lost output was high.

Politicians will always lean on central bankers—that is the argument for central-bank independence. The irony today is that their arguments are bolstered by people's unrealistic expectations of central banks' powers. Mr Greenspan set the precedent when he saw off the worst of recession in spite of dotcom busts and terrorism. Central banks are powerful institutions. No wonder people expect them to step in when they need help.

Central bankers have never had any illusions of their own omnipotence. Theirs is an imperfect science and there are disagreements about what to target and how. Moreover, central banks make mistakes, as the Fed did in allowing the housing bubble to inflate. The extraordinary pace of financial innovation and globalisation has been a nagging source of self-doubt.

Knowing how hard it is to get things right, central bankers find their reputations for proficiency invaluable. In normal times, a reputation helps to anchor low inflation. If policy turns out to be slightly too loose, prices are less likely to take off. That is good for the economy's stability. The trouble is that in crises, central bankers' reputations feed the demand for action, whatever their formal independence is supposed to guarantee. And that may lead to too much intervention too soon.

The hope in the financial markets is that the worst of the credit crisis is now past. This optimism may be justified. But things are still far from normal. Even as share prices keep rising, the credit markets struggle to get deals away. Although spreads have narrowed, they remain stretched. Fix bankers with a hard stare and their swagger soon fades.

That suggests the financial and economic ramifications of a remarkable summer have still to work through. If the real economy slows by much, it will feed back into the financial sector and the screw will tighten once more. Central bankers must already be looking back on recent sunny uplands with a touch of nostalgia. After all, they are only human.